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Thursday, November 29, 2012

Negative Externalities and Health Care

Any case for government regulation of the economy ultimately boils down to dealing with unauthorized and unwelcome liability transfer. For example, a factory that heavily pollutes the air and water spreads liability to the community surrounding it. Because the factory isn't the only party that has risk exposure to the pollution it creates, it is ultimately beneficial for the community to redirect all of that liability that the pollution represents back to the factory in the form of regulation.

This is where the government steps in. It can levy taxes on the factory so it can use that money to mitigate the impact of the factory's pollution. Or it can mandate that the factory somehow limit its pollution to levels deemed safe by a credible party. However, sometimes the government can go too far. It can overtax the factory or regulate its operations to the point of infeasibility. And sometimes it's hard to determine the liabilities involved. What is a "safe" level of air and water pollution?

But that's nothing compared to the kind of regulation that befalls the health sector. Possibly the most politically popular provision of the PPACA (aka Obamacare) is that it forces health insurance companies to extend coverage to the insured's dependents as long as they are under the age of 26. Taken in a political vacuum, there is no compelling reason for the government to mandate this provision. But because people think that they won't have to pay for it, they're happy with it.

The two biggest beneficiaries of that rule are the parents (who want to insure their children/dependents) and the children/dependents themselves. Depending on how the rest of the health insurance sector is regulated, the insurance company can either eat the extra cost, pass it to the insured, or pass it its other customers, or some combination of the above.

The arguments for the provision are mostly self serving and wrongheaded. From an actuarial standpoint, it is actually extremely cheap to insure twentysomethings. They are far more healthy than the average American and therefore demand less services from the health sector. So why are they not getting insurance by themselves? There are two big reasons:

Despite the fact that it's theoretically cheaper to insure a person in their early-mid 20s, individual plans are usually more expensive because a company can deduct health benefits for employees from its tax liability. A family (generally) can't due to rules in the tax code.

People in their 20s, sensing that they most likely won't need to use health insurance, forgo coverage even though many of them can actually afford it. For this demographic, having an iPhone and a good service plan is more important than health insurance. They might not be entirely wrong.

The biggest portion of the PPACA is focused on getting 30+ million uninsured people insured. The vast majority of these people are either poor, young, or both. Because most insurance markets don't allow insurance companies to price discriminate based on age, young people are essentially going to be forced to subsidize old people and poor people.

It's also likely that those already insured will also see a deterioration of their own insurance plans either through benefits reduction or by virtue of an overloaded health sector. Come 2014, we'll add 30 million to the insurance rolls but we won't have a commensurate increase in health providers. So what exactly is the net benefit here? Poor people can have subsidized insurance. But the cost is trickier to calculate.

When the PPACA passed, Democrats hailed it as landmark legislation that would help people and tamp down health inflation. I will be very surprised if it does the latter. In the rush to "do something", it is highly possible that the Federal government may have done something for the worse. Sometimes it's possible for a government, so focused on the negative externalities caused by the private sector, to create negative externalities by its regulation.